Next week’s European Council is potentially the most important political meeting the EU will have had in years. It could pave the way for a eurobond. Bruno Le Maire gave us some idea yesterday about the nature of the compromise that is currently under negotiation. He told Kathimerini that liability would not be fully shared, without spelling out in detail what this means or how it would work. Under tort law, there are three forms of liability in multi-party debt contracts - several, joint, and joint and several. The first two are self-explanatory. Under the latter, a claimant can direct a claim against a single party. If that claim succeeds, the others also have to pay up in proportion to their share. If one defaults, the others have to step in. For a mutualised bond, joint and several liability would be the normal way to proceed. Under several liability, each member state would raise national debt, and then put the money into a joint pot. We think this would defeat the purpose of a recovery fund, and not bring us any step closer to a eurobond either.

The main financial purpose of a mutualised bond would be not to increase the debt burden of member states. This requires an entity to fund post-crisis investments that is legally separate from the member states. The benefits of vehicles with separate liability to members states like Italy and Spain would then come only through the cross-border transfer within the fund, when one country receives more money from the fund than it pays in. We would not be surprised if Germany and the Netherlands ended up getting almost as much out of such a fund as they pay in, if only because these countries have enough shovel-ready investment projects. So, what is dressed up as a European fund is in fact likely to be a sum-total of national pork-barrel schemes with only a tiny fraction of embedded transfers.

We don’t, of course, know that this will be so. But this is what we will be watching out for next week. A fund so constructed would not be of macroeconomic relevance. Our chief concern is that we are heading for another of those symbolic EU moments where not much of substance is agreed, but everybody revels in the success of getting a deal done. In other words, another press release.

Le Maire talks about €1tr for the size of the fund. We think it is likely to end up at €500bn at most. Spread over three years, the impact would be 1.4% of eurozone GDP. From that you would have to deduct the component that is nationally financed, because that money would have been invested anyway. And then you may end up looking at numbers that are in the category of statistical noise. We would rather have joint and several liability of €500bn than several liability over €1tr.

Le Maire’s diplomacy consists of separating this fund from the general discussion of a eurobond. He makes the point that the purpose of a eurobond would be to mutualise existing debt, whereas this fund is forward-directed only, and of limited duration. He appears to rule out the idea of a coalition of the willing, calling it sub-optimal according to Kathimerini. We get the sense that the French are keeping the option open as a negotiating device, but they are not seriously pursuing it. There is zero awareness of this implicit threat in Berlin.

This is also why we would not read too much into Emmanuel Macron’s warning of a failure of the EU. For us the issue is not whether the EU agrees to something. It usually does, though not always immediately. Ten years of high-noon European Councils with lots of agreements have not rendered the eurozone any more sustainable. The survival of the monetary union still depends wholly on the ECB’s willingness and readiness to push the legal limits of its mandate.

A €500bn fund under several liability will not change that fundamental setup.

The IMF’s Fiscal Monitor noted yesterday that the discretionary revenue measures were much lower in the eurozone than in other industrialised countries. A large mutualised recovery fund is needed to redress that imbalance. With several liability, member states will be as reluctant as they are now to trigger the bazooka.

We think it is perfectly possible for the EU to fail even if there is a deal. Just as it is possible for the EU to scrape through this crisis without one, so long as the ECB stands ready.